Managing oil wealth

Abstract

The economic record of mineral-exporting countries has generally been disappointing. Oil exporters, in particular, have done far less well than resource-poor countries over the past few decades, especially when one considers the big revenue gains to the oil-exporting countries since 1973, when oil prices soared. Why is this the case? Perhaps it is because of the way oil economies are run. Managing oil revenues well is much the same as managing any budget well, but some issues are more important for oil exporters. These include how much to save for future generations, how to achieve economic stability in the face of uncertain and widely fluctuating oil revenues and avoid "boom-bust" cycles, and how to ensure that spending is of high quality, whether in the form of large investment projects, public consumption, or subsidies. The prescriptions for tackling these challenges are straightforward enough in theory. But they often confront the reality of opaque, highly politicized fiscal systems that lack the checks and balances needed to ensure that resources are well employed and to provide the fiscal flexibility needed to adjust spending in line with changes in resources. In extreme cases, when a government remains in power only because of oil money, no fiscal adjustment will be possible unless forced by a crisis. This article compares the political economy of fiscal policy and economic management across oil-exporting countries with widely differing political systems, attempting to identify factors that have helped some to manage their oil revenues effectively and to draw some lessons.